ECONOMIC VALUATION METHODS

Annex A to “Economic Valuation of Environmental Damage – Methodological Convention 2.0 for Estimates of Environmental Costs”

Imprint

Publisher: German Federal Environment Agency (UBA) Press Office PO Box 1406, 06813 DessauE-Mail: pressestelle@uba.deInternet: www.umweltbundesamt.de

Date: August 2012

Editorial: Section I 1.4 - Economic and Social Environmental Issues, Sustainable Consumption

Author: Dr. Sylvia Schwermer

Translation: Terence J. Oliver

Layout: UBA

Cover photo: © Wrangler / Fotolia.de

Contents

A 0 Introduction ................................................................................................................. 4

A 1 Valuation where market prices are available .................................................................. 4

A 1.1 Market prices as indicators of scarcity .......................................................................... 4

A 1.2 Value-added method .................................................................................................... 6

A 1.3 Estimating costs of reducing or remedying damage ...................................................... 8

A 1.4 Estimating substitution and compensation costs .......................................................... 9

A 2 Indirect valuation methods for estimating willingness to pay for environmental assets 10

A 2.1 Hedonic valuation method ......................................................................................... 10

A 2.2 Expenditure and travel expenses methods ................................................................. 12

A 2.3 Estimating target achievement costs / avoidance costs .............................................. 13

A 3 Direct valuation methods for estimating willingness to pay for environmental goods ... 14

A 3.1 Contingent valuation method ..................................................................................... 15

A 3.2 Attribute-based valuation approaches (conjoint analysis) .......................................... 17

A 3.3 Participatory valuation methods ................................................................................. 18

A 3.4 Asking public decision makers about their preferences .............................................. 19

A 4 Benefit Transfer: Using existing information for economic valuation ............................ 19

A 4.1 Quality criteria for carrying out a benefit transfer ....................................................... 20

A 4.2 Databases and information sources ............................................................................ 21

A 4.3 Transfer of results from other countries ...................................................................... 23

Bibliography ............................................................................................................... 25

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A 0 Introduction

A crucial factor in the choice of method for valuing environmental damage costs is whether the

costs concerned are tangible or intangible. Tangible environmental damage – e.g. production

losses – can be valued at market prices. These also include “repairable” damage such as

material damage to facades. The costs of the necessary repair measures are a suitable indicator

for registering such damage. Chapter A 1.1 explains the conditions under which valuation at

market prices constitutes a valid estimate of environmental damage.

However, many impacts on man and the environment are of an intangible nature. These

include effects which impair environmental quality (and lead to a reduction in the recreational

value of forests, for example), adverse effects on physical and mental well-being, and

influences bringing about a change in accident and mortality risks, where these go beyond the

measurable costs of hospitalisation, medication and loss of earnings. When it comes to valuing

such losses of benefits, simple recourse to market prices or restoration and remediation costs is

not sufficient. It is necessary to find other means of drawing conclusions about individuals'

judgements from their market behaviour (indirect valuation methods) or by asking the people

concerned (direct valuation methods). Chapters A 2 and A 3 describe the valuation methods

than can be used here. Finally, Chapter A 4 focuses on explaining “benefit transfer”, i.e. the

issue of how existing estimates can be applied to a new valuation problem.

A 1 Valuation where market prices are available

A 1.1 Market prices as indicators of scarcity

According to economic theory, the costs of a measure should basically be registered as

opportunity costs. They reflect the result of foregoing other uses of the production factors, in

other words they are indicators of scarcity.

Market prices function as scarcity indicators

- if the market concerned is competitive;

If the market departs from this situation, e.g. because it has a monopolistic structure, it

becomes necessary to adjust the market prices (downwards) for valuation purposes.

However, practical solutions to this general problem are rarely found. In most cases the

considerable effort and expense involved in obtaining the information results in a

decision not to determine the extent of market imperfection with the aid of suitable

factors (e.g. Lerner's degree of monopoly).

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- if the prices are not affected by the measures to be valued (ceteris paribus condition);

Price changes can be expected in the case of “non-marginal” changes, e.g. if the aim is

to register and value the environmental impacts of all economic activities in a country

for a given year. Since the focus in such an approach is not on estimating the (marginal)

damage costs, but rather on estimating an eco-social product or the damage costs of an

entire sector, we will not pursue this any further in the discussion of methods.1

However, for a number of impacts to be assessed – including locally restricted effects

and those of very small extent compared with the economy as a whole – it is justifiable

to assume that the market prices remain constant.2

- if prices are not distorted by taxes, subsidies or governmental price setting (e.g. subsidised

prices for agricultural produce).

In these cases it is necessary to clarify whether factor costs or world market prices can

be used for valuation instead of market prices. In studies that estimate external costs or

environmental damage costs for several countries, we advocate adjusting market prices to

take account of indirect taxes and subsidies.3

As long as market prices can be interpreted as scarcity indicators, it is very easy to use the

concept of willingness to pay, because the observed market prices correspond to marginal

willingness to pay: The change in welfare can then be determined as the sum of the changes in

quantity weighted at market prices (e.g. additional repair costs due to material damage).

In summary, we can draw the following conclusions about the use of market prices:

In the following cases, valuation at market prices is a valid estimate of the environmental

damage:

There is a change in value added: The loss of economic benefit associated with an

impairment of environmental quality corresponds to the reduction in value added. For

example, a deterioration in water quality may make itself felt in increased costs for water

treatment for industrial use, or a deterioration in soil quality may result in production losses

in the agricultural sector. Increased costs may also occur as a result of necessary

substitution measures, e.g. the need to obtain water from elsewhere. This is explained in

Chapter A 1.2 using the example of yield losses in agriculture.

1 To judge non-marginal environmental impacts, it is necessary to fall back on macroeconomic models. Examples of this application can be found in the EU project GARP. 2 Price changes may however occur if the quality of the good is impaired by the environmental impact. In such cases the price change can be interpreted as an indicator of the change in quality. 3 For example, in the EU research project UNITE (2003) the damage was assessed using values of the production factors employed (i.e. at factor costs), thereby eliminating state transfers. This corresponds to the current standard according to the theory of economic welfare. Thus the valuation of loss of goods is to be interpreted as valuation of the production factors input into these goods which are no longer available for other uses. There is however the practical problem that differences between the systems of indirect taxation make it difficult to determine the level of factor costs on an international comparison.

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Damage can be reduced or remedied by taking appropriate measures: If the quality of the

damaged good can be restored by means of repair or refurbishment, the costs of the

restoration measures are taken as the yardstick for the environmental damage. If the

damage cannot be remedied entirely, these estimates represent a lower limit of the loss of

benefit. One example (material damage) is explained in Chapter A 1.3.

Functional losses can be remedied by taking appropriate measures: The valuation

approach is based on estimating the costs of the substitute or compensation measures

aimed at restoring the functions of the natural balance. This valuation approach can be

applied if the damage cannot be remedied but it is possible to provide compensation

elsewhere in the economy (e.g. compensation requirement under nature conservation law)

or by means of goods produced (e.g. technical rather than natural flood protection

measures).

A 1.2 Value-added method

Value-added method

Subject of valuation The increased production costs or reduced yields (or a combination of both effects) that result directly from an impairment of environmental quality.

Basic concept The loss of economic benefit associated with an impairment of environmental quality is measured in terms of the associated reduction in value added. For example, a deterioration in water quality may make itself felt in increased costs for water treatment for industrial use, or a deterioration in soil quality may result in production losses in the agricultural sector. Increased costs may also occur as a result of necessary substitution measures, e.g. the need to obtain water from elsewhere.

Validity Value-added methods are valid methods in cases where a relatively easily defined impairment of environmental quality is concerned.

Remarks Value-added methods are an acceptable compromise between simplicity and validity of the results. Valuation is subject to a certain risk of duplication, e.g. if one includes both yield losses and costs for possible substitution measures.

Fields of use Value-added methods can be used in nearly all fields of project valuation.

Example of application: Yield losses in the agricultural sector

When valuing yield losses in the agricultural sector4, the following cost categories may be

relevant for valuation purposes: Firstly, avoidance costs and adaptation costs resulting from

4 The following considerations can also be applied to production losses in other sectors.

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changes in producers' behaviour, and secondly, the costs of damage not avoided (assessed

yield losses)5.

Avoidance and adaptation costs

One possible adaptation reaction on the part of producers is to step up the use of certain input

factors such as fertilisers6 or calcium carbonate (lime) in order to reduce pollutant-induced

production losses. The costs can be determined, for example, by estimating the increased

application of lime to fields to neutralise the acid inputs. This makes it possible to express the

resulting additional production costs in monetary form by means of the market price of lime.

In the medium to long term, producers can also switch to plant species that are more resistant

to pollutants. This adaptation will – at least for a certain period – be accompanied by increased

costs which have to be included in the valuation.

It is also possible that the production losses could lead to production being discontinued – if

the profitability threshold has already been reached. In that case the valued decline in

production would overstate the costs. The reduced value of the land or the lost profit would

have to be taken as an indicator of the loss.7

Cost of unavoided damage: Yield losses

As guidelines for valuing production losses, the Federal Environment Agency recommends:

Valuation should basically be at world market prices if world trade is of significance for the

good in question.8

For goods which are rather of European, national or regional importance, we recommend

using European prices.9

If goods are confined to very restricted local trade, local prices are a suitable indicator.

In studies that estimate external costs or environmental damage costs for several countries, we

advocate adjusting market prices to take account of indirect taxes and subsidies (valuation at

factor costs).

The data sources used must be stated, and plausible explanations must be given for the choice

of method and any price corrections.

5 Regarding the question of what yield losses can arise from emissions of atmospheric pollutants, see the detailed analysis of existing studies in ExternE, volume 7 (1998): Methodology update, download from www.externe.info/ publications 6 Depending on the problem under investigation it may also be necessary to include the adverse effects of the increased use of fertiliser in the valuation. 7 If production is only reduced in part, it is assumed that the valued decline in production corresponds to the lost profit. This implicitly assumes that there is no change in production costs. 8 World market prices for wheat, barley, potatoes and oats can be taken from FAO statistics. 9 European prices for sugar beet and rye, for example, can be taken from the New Cronos Database at EUROSTAT.

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A 1.3 Estimating costs of reducing or remedying damage

Costs of measures which reduce the damage (but do not remedy it entirely) can be taken as a

yardstick for the lower limit of the loss of benefit. They must include not only the costs of

reducing material damage, but also the costs arising from adaptation and avoidance measures.

Estimating costs of reducing damage

Subject of valuation The loss of benefit due to an impairment of environmental quality is measured in terms of the (potential) expenditure that would be needed to avoid the damage.

Basic concept Expenditure on avoiding adverse environmental impacts is made where the resulting benefit is greater than the expenditure involved.

Validity The validity of the method depends on whether the measure valued (e.g. repairing damage to buildings caused by atmospheric pollution) remedies the damage entirely or leaves a certain residual damage unremedied. In most cases the estimate represents a lower limit of willingness to pay for improved environmental quality.

Remarks The expenditure on remedying the damage or adverse impacts must be capable of allocation. If the measure in question serves other purposes as well, or if it is implemented in the course of modernisation work that was due in any case, deductions must be made.

Fields of use The methods can be used for environmental impairments whose adverse effects can be mitigated by taking appropriate measures, e.g. installation of noise-proof windows, use of resistant facade finishes, water treatment costs. The method is applicable not only to valuation of private utility losses, but also to valuation of macroeconomic utility losses which are not individually allocatable (e.g. damage to public buildings and monuments, cost of restoring industrial waste land).

Not only the behaviour of individual injured parties, but also the behaviour of political decision

makers can be taken as an indicator for estimating public willingness to pay. Decision makers

may, for example, include representatives of local authorities (mayors, technical experts) who

take decisions on investments in the environmental and health sectors (construction of a noise

barrier, erection of traffic lights at a dangerous crossing, construction of a hospital etc.). The

costs of such decisions can be estimated and interpreted as a yardstick for the resulting benefits

for the population.10

10 This approach can be justified by arguing that such decision makers have been legitimated by democratic elections (or appointed as experts by democratically elected decision makers). This also assumes that such decision makers conscientiously represent public preferences to the best of their ability.

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Example of application: Damage to facade material

Atmospheric pollution gives rise to soiling of and damage to building facades. This results in

shorter maintenance intervals, thereby increasing average maintenance costs (restoration costs). These average maintenance costs are used as an indicator of the damage to materials.11

In this valuation it is assumed that a maintenance criterion exists, i.e. a fixed limit. If this limit is

exceeded, repairs must be carried out. In cases of material removal by corrosion, the

maintenance criterion is the “critical material removal” limit in micrometres specified by

experts, after which the surface of the material has to be renewed. If the focus is simply on

soiling of the facade (without simultaneous removal of material), e.g. due to soot, the

maintenance criterion describes the degree of soiling at which cleaning needs to take place.

Assuming the existence of a fixed maintenance criterion, there is no aesthetic loss of value in

addition to the maintenance costs, since although material removal takes place faster, its repair

is correspondingly more frequent. Thus there is no change in the average condition of the

facade. This means that, on the assumption that the material damage caused by atmospheric

pollutants can be completely remedied by the maintenance work, i.e. there is no irreparable

loss of value and substance, the extra maintenance costs cover the total damage caused by

atmospheric pollution.

To estimate the damage costs it is necessary to define a maintenance criterion and to determine

the reduction in maintenance intervals on the basis of this criterion. It is then possible to

determine the average maintenance costs for the lifetime of the building. The difference

between the maintenance costs with and without the environmental impact being valued

represents the amount of material damage costs.

A 1.4 Estimating substitution and compensation costs

Methods of determining substitution and compensation costs (including natural compensation)

play an important role in compensation measures under nature conservation law and in

environmental liability.12 In the case of natural compensation it is a matter of using appropriate

compensation or substitution measures to make the functions of the damaged natural resource

available once again. The cost of these measures is an indicator of the damage caused.

11 Aesthetic conservation costs over and above this level are disregarded, which means that this valuation tends to be a lower limit of the damage. 12 Cf. details in Kokott et al. (2003).

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Compensation costs and substitution costs

Subject of valuation If values and functions of the natural balance are impaired by an encroachment involving constructional measures, the resulting damage can be estimated as the costs of compensation or substitution measures.

Basic concept The valuation method is based on estimating the costs incurred for restoring the functions of the natural balance.

Validity The starting point for deriving monetary values is nature-conservation requirements relating to the scale of compensation or substitution measures (compensation requirement under nature conservation law, Section 8 of the Federal Nature Conservation Act (Bundesnaturschutzgesetz –BNatSchG)). The compensation requirement is interpreted as a societal consensus on the conservation of functions of the natural balance. The cost of the compensation measures therefore corresponds to society's willingness to pay.

Remarks The crucial test of whether this method is applicable is the question of whether a societal consensus exists about the need to compensate for this function. As a rule, only a lower limit for the damage is estimated if it is not possible to compensate for or replace all the functions of the natural balance.

Fields of use Examples include valuing the functions of natural spaces lost to traffic infrastructure;

estimating costs of market goods as a functional substitute for environmental goods, e.g. costs of technological waste water treatment as a substitute for the value of the cleansing performance of a reed zone;

compensation of damage to ecological assets in the context of environmental liability

A 2 Indirect valuation methods for estimating willingness to pay for environmental assets

Indirect valuation methods determine the value of a public good (environmental asset) and the

demand function for this good from observable (empirical) market behaviour of consumers

(revealed preference methods). In this context the term “indirect” indicates that estimates of

the value of non-traded environmental goods are derived from demand behaviour in relation to

goods traded in the market.

A 2.1 Hedonic valuation method

The basic idea of the hedonic price approach13 is that the quality of the environment indirectly

influences the price of certain goods. This applies, for examples, to real estate and housing.

13 The term “hedonic price approach” goes back to the assumption that a good – e.g. real estate – promotes the happiness of the buyer (hedone: ancient Greek for joy/pleasure) (cf. Court, 1939, p. 107, footnote 8). This approach works out the importance of one of the characteristics (in this case: environmental quality in the living environment) for the increase in happiness and uses it to derive an implicit price for environmental quality (by establishing a relationship between this effect and the effect of the purchase prices).

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Their proximity to recreation facilities may have a positive influence on the price. Conversely,

other site characteristics such as noise, air pollution or odours can adversely affect prices. The

central issue in this method is therefore to register significant price changes relating to the

characteristics of the living environment, with a view to obtaining information about the value

attached to local environmental quality. Environmental quality may also have an influence on

the labour market, e.g. a tendency for a greater supply of labour to exist in areas with high

environmental quality. This is the basic idea behind the “labour market models”, which

measure the influence of local environmental quality on job decisions and thereby make it

possible to draw conclusions about individual valuation of local environmental quality.

To arrive at reliable results, it is essential to isolate the influence of environmental quality on

the price of the other parameters (regression approaches). However, taking a large number of

explanatory variables into account may – if they are correlated among each other (e.g. good

transport connections and traffic noise) – lead to unstable results. The method also assumes a

rapid price response to changes in the determinants. The application of the method is

problematical if – owing to a regulated housing market, for example – rent prices only permit

limited conclusions about willingness to pay for improved environmental quality.

Analysis of housing market data / hedonic methods

Subject of valuation The loss of benefits in cases of impaired environmental quality in residential areas (e.g. due to traffic noise) is valued in terms of the difference in property prices as a function of environmental quality (e.g. peaceful location versus noisy residential area).

Basic concept Environmental quality is one determinant of demand for property. Given otherwise identical features, individuals are prepared to pay higher prices for properties in areas with high environmental quality. This makes it possible to draw conclusions about the value attached to environmental quality.

Validity Using this method presupposes that it is possible to isolate the influence of environmental quality on property prices and that property prices show a rapid response. It may be the case that loss of benefits is only registered for some of those concerned, which may result in under-estimation of the damage.

Remarks Relative complicated method which requires the estimation of property demand functions.

Fields of use Empirical fields of use for estimating the value attached to environmental quality can be found in the following areas: Benefits of air quality control measures at stationary or mobile sources, of water conservation measures and of noise control measures. In international research, this approach has been used in a number of valuation studies, e.g. for determining the value of natural resources in local recreation areas (cf. for example Pendleton/Mendelsohn, 2000).

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A 2.2 Expenditure and travel expenses methods

These methods based on travel decisions can be used to register a usage-dependent value

component of a resource. The aim is to use the expenditure on the visit or on the use of facilities

to draw conclusions about willingness to pay for the environmental assets used in the process.

Thus the methods are based on observable behaviour and data (visitor numbers, travel route,

admission prices, transport costs etc.). A distinction is made between gross expenditure

method, admission price method and total expenditure method.

Gross expenditure method

Subject of valuation The loss of benefits arising from an impairment of the recreational value of natural landscapes is valued in terms of the total expenditure per day made explicitly on recreation, multiplied by the reduced number of user days due to the impairment.

Basic concept The recreational benefit is rated at least as high as the associated expenditure (e.g. cost of driving to get there).

Validity The method measures the lower limit of willingness to pay for conserving the natural landscape.

Remarks Problems arise with regard to allocation of the expenditure made on the recreational process, especially if trips serve two or more purposes.

Fields of use The gross expenditure method is a method that is widely used in German-speaking countries for determining the benefits of recreation. The approach can be applied as an inexpensive method of estimation for expenditure-intensive uses in particular (e.g. water-skiing). It is not very suitable for low-expenditure uses (e.g. going for walks), in view of the fact that it tends to underestimate the benefits.

Admission price method

Subject of valuation The loss of benefits arising from an impairment of the recreational value of natural landscape is valued by estimating a plausible admission price (calculated on the basis of a comparable private facility or the average travel costs), multiplied by the reduced number of visitors resulting from the impairment.

Basic concept The recreational benefits are at least as high as the admission price payable.

Validity The method measures the lower limit of willingness to pay for conserving the natural landscape, provided that it is possible to determine both the price of a comparable private facility and the reduction in the number of visitors.

Remarks This method only appears to be a simple one. The estimate of a plausible admission price is crucial to the result and must therefore be carefully justified. In general it is very difficult to identify comparable private facilities. Although the travel costs paid can be used as a rough indicator, they are not suitable if a trip serves two or more purposes.

Fields of use The admission price method has been used in the USA in particular to assess the recreational value of water-resource projects.

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Total expenditure method

Subject of valuation The loss of benefits arising from an impairment of the recreational value of natural countryside landscape is valued in terms of the total expenditure per day that can be directly allocated to the activity, multiplied by the user days reduced by the impairment. Unlike the gross expenditure method, it is possible here to include and monetarise fictitious costs (time costs) and travel preparation costs as well.

Basic concept The recreational benefits are at least as high as the total expenditure (e.g. travel costs, time taken).

Validity The method measures the lower limit of willingness to pay. By taking account of expenditure that is not directly reflected in actual out-of-pocket expense, it achieves a more valid approximation to actual willingness to pay than the two methods described above.

Remarks As with the gross expenditure method, there are problems regarding the allocation of expenditure.

Fields of use Like the gross expenditure method, the approach can be used as a low-cost estimation method for high-expenditure uses. It is not very suitable for low-expenditure uses, in view of the fact that it tends to underestimate the benefits.

A special form of the indirect valuation methods is the contingent behaviour method. Whereas

the expenditure and travel cost methods investigate the actual behaviour of individuals,

surveys of this type ask about their future decision behaviour as a function of environmental

quality. First the respondents are told about the intended improvement in environmental

quality, for example, then they are asked how this improvement would influence their usage

behaviour. The calculated change in use costs can be interpreted as willingness to pay for the

improvement in quality. This kind of approach serves to confirm the results obtained from

observed behaviour, e.g. from the travel costs method.

A 2.3 Estimating target achievement costs / avoidance costs

There are several damage categories for which knowledge about the dose-response relationship

and/or the monetary values of damage is (still) insufficient to permit a calculation of external

costs with sufficient certainty. In such cases, the “standard price approach” can and should be

used as the second-best solution to express environmental impairment in terms of costs.

Moreover, the fact that the cause-and-effect mechanisms are known, but highly complex (e.g. if

interactions and local circumstances play an important role) argues in favour of choosing this

approach. The aim of the standard price approach is to estimate the cost of achieving targets or

of avoiding impairments. The prerequisite for this is that there is an environmental protection

target which is accepted and desired by society. Targets can take the form of national

environmental action targets (e.g. climate protection) or environmental quality targets (e.g.

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critical loads). However, these cost estimates are not suitable for justifying the targets set

(circular argument).14

To be able to estimate the costs of target achievement it is necessary to specify measures for

achieving the targets. In simple cases the lowest-cost measures are known. Frequently,

however, a whole package of measures is needed to achieve an environmental target. In such

cases, target achievement costs can be estimated by using model calculations. As a rule, this

involves contrasting a reference scenario with a measures scenario which embraces the lowest-

cost measures for achieving the environmental target. The models determine the relevant costs

by comparing the two scenarios. Establishing a relationship between the overall costs of target

achievement and the reduced emissions makes it possible to calculate the average costs of

target achievement. The costs of reducing the last unit of emissions are known as the marginal

costs of target achievement. The synonym “avoidance costs” (average avoidance costs,

marginal avoidance costs) is also used. As a rule, the marginal costs are higher than the

average costs.

A 3 Direct valuation methods for estimating willingness to pay for environmental goods

Direct valuation methods determine willingness to pay by questioning individuals using

special interview techniques. Since surveys usually involve considerable amounts of time and

money, these methods are only used where it is not possible to draw conclusions about

economic value judgements from observable market behaviour.

Unlike indirect valuation methods, direct surveys can provide information about existence

values (e.g. knowledge about the existence of natural landscapes or species from which the

respondents do not derive any direct benefit) and option values (i.e. conservation of the

potential opportunity to experience natural landscapes, although the respondents do not

currently take advantage of this opportunity). Direct valuation methods may therefore serve to

estimate both use and non-use values. Areas of application include estimating willingness to

pay for the conservation of natural landscapes in order to protect biological diversity and

assess environmentally induced health risks.

When using direct surveys of affected persons to determine willingness to pay, it is necessary to

take the risk of distorting values into account. According to Endres15, three main problems can

be distinguished here:

14 Regarding suitable targets for consideration, see the remarks in Methodological Convention 2.0, Chapter 2.3. 15 Cf. Endres/Holm-Müller (1998).

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Abstraction problem: This problem arises if it is difficult for respondents to associate

environmental quality levels with monetary amounts. This may be the case if the

respondents are asked to value the loss of non-substitutable environmental goods or

functions. In this case the direct valuation method reaches its limits.

Reward problem: In surveys, individuals have considerably less incentive to think

about their preferences and willingness to pay than in decisions about widely marketed

goods. Arbitrary responses about willingness to pay do not generally have any

consequences, whereas errors of judgement when buying or selling goods make

themselves felt in monetary losses.

Free-rider problem: In certain circumstances respondents may have an incentive to

refrain from disclosing their real willingness to pay for strategic reasons. If they think

that their declared willingness to pay will be taken as a basis for demanding actual

payments, they have an incentive to understate such willingness. By contrast, there is

an incentive to exaggerate if they do not expect that they will have to make actual

payments.

The practical application and further development of the survey-based methods have seen not

only the development of survey techniques that limit the incentive to adopt strategic

behaviour, but also trials of statistical test methods which provide information about possible

distortions and error localisation that cannot be discussed in detail here. For example, the

“scope test” is used to investigate whether statements about willingness to pay respond as

expected to alterations in the scope of the programme. In the USA the successful performance

of this test is a prerequisite for being allowed to use the findings of surveys about willingness to

pay in court actions for compensation.16 In summary, it can be said that the risk of strategic

behaviour in the empirical collection of data for environmental quality aspects is less important

than the public debate frequently suggests. Nevertheless, surveys usually involve considerable

inputs of time and money. Before they are used, a careful investigation should be made of the

cost-performance ratio for the problem in view.17

A 3.1 Contingent valuation method

The contingent valuation method is a survey-based method which asks about individual

willingness to pay for a specific environmental quality. It uses econometric methods to

calculate an average willingness to pay and to determine the amount of damage by multiplying

this average figure by the number of individuals affected. It can also explain variations in

individual willingness to pay as a function of the characteristics of the natural resources in

16 Cf. for example Degenhard et al. (1997). 17 For a description of the methods cf. for example Ewers/Schulz (1982). For an overview of recent analyses of willingness to pay for nature conservation tasks and the conservation of biodiversity, cf. for example Degenhardt et al. (1997) and Geisendorf et al. (1998).

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question and the socio-economic profile of the respondents (income, age, state of health, level

of information). This permits answers to the question of whether and to what extent the

findings can also be transferred to other countries or sections of the population.

Trendsetting contingent valuation studies in the German-speaking countries include the survey

of willingness to pay for better air in West Berlin (Schulz) and for noise reduction in Basel

(Pommerehne). The latter study also provided evidence that the contingent valuation method

and the market-price method, applied to the same survey universe (population of the city of

Basel and their rent prices), lead to very similar and hence consistent results.

Contingent valuation method studies are very reliable if they value natural assets with which

the respondents are familiar. However, problems arise if there is a need to value

multidimensional changes in environmental quality that place great demands on the length of

the interviews and the size of the sample.18

The contingent valuation method is the subject of intensive and controversial discussions in

economic theory. These are primarily concerned with the question of whether the method is

suitable for valid and sufficiently precise determination of figures that are independent of

usage.19 Intensive research has been carried out into a number of methodological shortcomings

traditionally attributed to the contingent valuation method (e.g. influence of information,

choice of payment instrument, strategic behaviour by respondents, failure to cater for budget

restrictions). This has led to the development of suggestions for designing questionnaires to

avoid potential sources of error, with the result that experts increasingly regard these problems

as controllable.20 This also applies to the “embedding effect”. This term describes the

observation that respondents in contingent valuation studies frequently state figures for

willingness to pay for the conservation of a specific species that are similar to their willingness

to pay for the conservation of all endangered species together.21 In general terms, where this

effect occurs the willingness to pay for an individual good is as high as for a package of goods

that includes this individual good.22 However, latest research indicates that the embedding

effect does not occur regularly in such surveys and can be revealed and avoided by using

appropriate survey techniques.23

Direct surveys are the only means of taking account of non-use-dependent values as well.

When determining non-use values it is necessary to arrive at a plausible delimitation of the

relevant market for the natural asset in question.24 The theoretical limit of the field investigated

is reached where the environmental damage no longer has any influence on the welfare of the

18 Cf. MacAlister et al. (2001). 19 For an overview, cf. Carson et al. (2001). 20 Cf. Loomis (1999) and Bjornstadt/Kahn (1996). 21 Cf. Kahneman/Knetsch (1999). 22 In practical damage valuation the embedding effect played a role, for example, in the Nestucca Oil Spill (1988) off the coast of the US state of Washington. The contingent valuation study performed there revealed that willingness to pay for the prevention of a single, moderate oil spill was actually higher than for the prevention of all oil spills. Cf. Rowe et al. (1992). 23 Cf. Hoehn/Loomis (1999). 24 For an overview of this problem in the German literature, see: Rommel (2001).

16

individuals.25 It is often virtually impossible to define this limit clearly, since non-use values at

a great distance from the site in question may be of relevance in the case of important natural

assets. When choosing the survey area it is also necessary to take account of the fact that

substitutes may exist for the population at a great distance from the site in question. The larger

the geographical survey area chosen, the more likely it is that, even if individual willingness to

pay is low, the overall economic value rated may reach a considerable magnitude and result in

a high overall damage figure. Thus the results of contingent valuations react very sensitively to

the chosen market definition.26 In view of this, the valuation results should always mention

how sensitively the perceived overall economic value reacts to the delimitation of the market.

In order to ensure the validity of the results of contingent valuations it is necessary to observe

the usual quality criteria.27

A 3.2 Attribute-based valuation approaches (conjoint analysis)

Partly as a reaction to the methodological controversies about the contingent valuation

methods, increasing attention has recently been attracted by a group of valuation methods

known in the literature as attribute-based valuation methods or conjoint analysis. These too are

survey-based methods, but the valuation of environmental goods is achieved by comparing

specified alternatives which the respondents are asked to put in order of preference. The basic

idea is to present the respondents with various alternatives that differ with regard to certain

attributes. Conjoint analysis is primarily esteemed and used as an alternative valuation method

in the case of complex and multidimensional public goods such as landscapes.28 Some authors

also see a field of use in environmental liability.29 For example, using conjoint analysis could

make it possible to identify direct natural equivalents for damaged natural assets, without

having to fall back on the roundabout route of using “money” to cost their individual values.

This would make conjoint analysis a suitable instrument for simplifying difficult balance-of-

interest decisions when choosing between various restoration options.30

However, the conjoint analysis approach does have certain deficits from the viewpoint of

economic theory and the measures of welfare used here, and not all authors confirm its

25 DesVousges et al. (1998). 26 For example, in a case of damage in the USA – water pollution due to mining waste from the Eagle Mine (Colorado) – the economic expertises submitted to the court arrived at extremely different damage figures (USD 140,000; USD 15 million). This difference between the expertises submitted by plaintiff and defendant was due entirely to the differences in the geographical extent of the survey area that was considered relevant in the two cases. Cf. Kopp/Smith (1989). 27 For the design and analysis of contingent valuation studies, the economists Arrow and Solow have formulated recommendations which were drawn up at the instigation of the Damage Assessment and Restoration Program (DARP) of the National Oceanic and Atmospheric Administration (NOAA) within the US Department of Commerce. After the accident involving the oil tanker “Exxon Valdez”, this organisation made efforts to draw up quality criteria for testing damage valuations against the background of the methodology. Observance of these rules was recommended to increase the reliability of the results and to avoid the typical sources of error explained above. 28 Existing studies include Goossen/Langers (2000) and Jung (1996). 29 Cf. Mathews et al. (1995). 30 Farber/Griner (2000).

17

practicability.31 In view of these criticisms, researchers have developed the approaches of

choice modelling and choice experiments from conjoint analysis.32 Unlike conjoint analysis,

valuation here is not by means of paired comparisons. Instead, the respondents select the

variant that they prefer above all others.

Owing to the complexity of such questions, the survey usually takes the form of personal

interviews, and here too, the choice of a representative sample is critical for the reliability of the

results.

The three main steps in this method are:

1. Identify the characteristic attributes of a good or project.

2. Create “choice cards” with different combinations of manifestations of the attributes:

3. Get the respondents to repeatedly choose their preferred alternative from a set of between

two and five different choice cards.

To estimate the individual perceived value for a resource, the willingness to pay is determined

via the costs as an attribute of the different variants. Some authors also use this method to

estimate non-use-dependent values of environmental resources.33

This group of methods thus provides an alternative approach to the contingent valuation

method, albeit one which faces similar problems with regard to its practicability, e.g. in relation

to time and money input, and which is therefore probably only relevant in cases of major

environmental damage. Although the US rules for damage valuation permit the use of this

group of methods, its acceptance by the courts has yet to be clarified, especially with regard to

the valuation of non-use values. Compared with the contingent valuation method, conjoint

analysis is seen to have a significant advantage, though one that is not undisputed in economic

literature34, in the fact that explicit valuation of natural resources in terms of monetary units,

which some critics consider to be fraught with fundamental problems, can be avoided without

having to dispense with a preference-based valuation method.

A 3.3 Participatory valuation methods

In complex environmental problems there is a risk that the respondents may not have enough

background information to give reliable answers to the question about perceived monetary value.

Participatory methods can be used to remedy this problem. The most important sub-groups of

these methods are the Citizen Juries and the Market Stalls approaches. As yet, there are no

accepted German terms for these innovative methods. The methods can best be compared to

organised discussions.

31 Cf. Kopp (1999). 32 Cf. Rose (1999). 33 Louviere et al. (2000). 34 Cf. Flores/Thacher (2000).

18

Both methods use a random sample of the population (usually 10-12 persons for Citizen Juries

and 8–10 persons for Market Stalls) who have several sessions with group discussions and expert

hearings over a period of two to three days.

In Citizen Juries the discussions are held both within the population sample and with

acknowledged experts on the situation to be assessed. At the end of the last meeting they make a

joint valuation – e.g. of the environmental asset. The valuation does not necessarily have to be in

monetary units.

Unlike these methods, the Market Stalls approach always involves a confidential direct question

about the monetary value of the good in question at the end of each session. In the intervals

between the group sessions the participants have to document ideas and questions in a personal

diary; they discuss these in the next group session, which may result in the previous day's

willingness to pay being updated.

Both methods have the advantage that they remedy the information problem, and also that the

participants get to grips with ethical and social aspects of the problem in view. There are many

indications that decisions arrived at by group discussion and consensus tend to produce better

results than isolated individual decisions.

A 3.4 Asking public decision makers about their preferences

The method of asking public decision makers about their valuation of non-market goods is

motivated by similar considerations to those underlying the participatory valuation approaches

just described. This approach is based on the presumption that these actors are legitimate

representatives of private individuals.

Here too it is possible to construct widely differing survey designs depending on the subject of the

investigation: these range from a contingent valuation survey, through a more complex

experiment, to a multi-criterion analysis in which the respondents first have to explicitly

appreciate the relative weighting of the criteria to be valued and then disclose it. Here – much as

in participatory valuation approaches – it is also possible to use methods with joint discussions

and consensus identification between different decision makers and experts.

A 4 Benefit Transfer: Using existing information for economic valuation

Benefit transfer means that the valuer uses existing estimates and applies them to the problem

under investigation. There are different concepts for this (e.g. transferring an average price,

deriving willingness-to-pay functions or metafunctions, preference calibration). They differ in

the theoretical plausibility of the results and the input needed for transferring the data.

The prerequisite for being able to run a benefit transfer is the existence of primary studies that

value a comparable environmental asset. The decisive advantage of this method is the great

19

reduction in the work needed for a benefit transfer compared with a primary study – if

adequate primary studies are available the calculation may take only few weeks to perform.

However, this has to be set against considerable disadvantages with regard to the validity and

reliability of the results. Economists have expressed fundamental utility-theory reservations,

according to which the use of the method is not permissible according to strict economic

criteria.35 There are also a number of practical problems which may occur as early as the

primary data collection stage and which may to some extent make transfer of the data

impossible.36 There is general agreement that a number of quality criteria must be satisfied for

a benefit transfer.37

A 4.1 Quality criteria for carrying out a benefit transfer

When carrying out a benefit transfer it is necessary to observe the relevant quality criteria38,

which can be summarised as follows:

1. The characteristics of the damage to be valued must display a large measure of agreement

with the primary study.

2. The socio-economic conditions must be largely similar. The reliability of an international

transfer of data is considerably poorer than that of a regional transfer within a country.39

3. The primary study needs to be sufficiently well documented to permit variation of certain

parameters in the course of the transfer.

4. The definition of the market must be plausible and logical. It must be possible to draw

conclusions about average willingness to pay. To calculate the aggregated benefit on the

basis of a benefit transfer, it is usual to multiply the average willingness to pay from the

primary study by the number of households affected by the environmental damage in

question.40

5. The results should be as up to date as possible. We recommend adjusting the results of

older studies to take account of changes in income (having regard to income elasticity).

Transferring the results of existing studies can be recommended if figures for clearly defined

end points are available (e.g. a person's willingness to pay for avoiding a day's coughing

instead of willingness to pay for a reduction in air pollution in general). To be able to transfer

such monetary values, the damage due to the environmental impact in question must be

specified – in the context of the impact analysis. Also, if the transfer of values involves

35 Cf. Ahlheim/Lehr (2002). 36 Cf. Brookshire/Neill (1992). 37 Cf. Unsworth/Petersen (1994). 38 A number of quality criteria for carrying out a benefit transfer have been developed in the literature, including Unsworth and Petersen (1994), MacAlister et al. (2001), Ahlheim and Lehr (2002). 39 Cf. Muthke (2001). 40 Cf. OECD (2002).

20

uncertainties, this approach at least offers a greater degree of transparency and flexibility

(individual figures are easier to verify and, if necessary, replace).

A number of figures from the ExternE project funded by the European Commission can also be

used for benefit transfer. Cost rates are available for defined end points (e.g. health disorders);

these can be used if information exists about the health risks arising from the environmental

damage.41 Figures are available for the average damage (health, material, crop losses) due to

air pollution by SO2, NOx, NMVOC, PM10 and PM2,5. These figures are also differentiated by

locational criteria (e.g. rural, urban) and by the height at which the emissions are released (e.g.

high chimney, close to ground).

A 4.2 Databases and information sources

Today a variety of databases and tools relating to environmental costs are available on the

Internet and could be considered as a source for a benefit transfer. It is necessary to distinguish

here between databases that contain results of valuation studies, and recommendations for

rough estimation of costs. The cost rates and underlying dose-response relationships currently

used in the studies of the ExternE project series are documented in detail in European

Commission (2005).42

Databases with results of valuation studies:

RED – Review of Externalities Data (www.red-externalities.net), includes in particular

quantitative European studies of external environmental costs in the fields of power

generation, transport and waste management.

ENVALUE – Environmental Valuation Database (www.epa.nsw.gov.au/envalue/), contains

more than 400 studies, of which 15 percent are European studies.

EVRI - The Environmental Valuation Reference Inventory (http://www.evri.ec.gc.ca/) is a

database with information on nearly 1000 international valuation studies (including 165

European studies). The information is available free of charge exclusively for persons in the

USA, Canada, the United Kingdom, Australia, New Zealand and France.

Valuation Source List for the United Kingdom of the Department of Environment, Food and

Rural Affairs (DEFRA) (http://www.defra.gov.uk/environment/economics/evslist/) is a

compilation of some 550 studies, mainly from the United Kingdom.

41 Cf. European Commission (2005), p. 85. 42 ExternE - Methodology 2005 Update (http://www.externe.info/brussels/methup05.pdf).

21

Benefit Tables:

There is also the Benefits Table for valuing marginal costs due to air pollutant emissions,

published by the DG Environment of the European Commission

(http://www.europa.eu.int/comm/environment/enveco/air/betaec02aforprinting.pdf). A

similar approach, albeit in the form of an Internet-based tool on the basis of improved methods

and more recent data, is found in EcoSenseLE (www.externe.info/ecosle.html). However, both

approaches only permit a rough calculation of possible damage due to air pollutant emissions,

since it is not possible to take adequate account of important aspects such as the site-

dependence of local damage or the non-linear nature of damaged induced by air pollution.

Information about results of the studies in the ExternE project series commissioned by the

European Commission

Information about the ExternE project series and the data sources and assumptions used can be

reached via the following links:

www.externe.info: Overview of the European Commission's project series “Externalities of

Energy – Impact pathway approach methods, studies, results and further references”.

http://www.externe.info/applications.html

Overview of existing applications of the ExternE method

http://www.externe.info/projects.html

List of studies carried out to date with references to reports and other information.

Descriptions of methods and exposure-response relationships

Description of the method developed in the European Commission's ExternE project series for

determining external environmental costs - 2005, 1998 and 1995.

ExternE - Methodology 2005 Update (http://www.externe.info/brussels/methup05.pdf)

ExternE - Methodology 1998 Update (http://www.externe.info/reportex/vol7.pdf )

ExternE - Methodology Report (1995) (http://www.externe.info/reportex/vol2.pdf)

http://europa.eu.int/comm/environment/air/cafe/activities/cba.htm: Cost-Benefit Analysis of

the CAFE Programme - cost-benefit analysis methods in the CAFE programme (Clean Air for

Europe)

Environment and health

WHO - Air quality and health (http://www.euro.who.int/air/activities/20050512_1 ) contains

evaluations of studies on health damage due to air pollutant emissions in Europe.

http://www.euro.who.int/air

This provides information from the World Health Organisation (WHO) on air quality and health.

22

Damage to materials

http://www.corr-institute.se/ICP-Materials/

UNECE ICP Materials – description and results of the UNECE measurement programme on air

pollutant damage to material surfaces. It also includes a list of derived exposure-response

relationships.

Environment and transport

http://www.uic.org/IMG/pdf/external_costs_of_transport_in_europe-update_study_for_2008-

2.pdf

External costs of Transport in Europe. Study commissioned by the International Rail Federation

–update study 2008.

A 4.3 Transfer of results from other countries

The number of studies suitable for benefit transfer that have been carried out in other countries

varies considerably. There are far more studies for the Anglo-Saxon countries – especially the

USA – than for Germany. This is primarily due to the stronger tradition in these countries of

carrying out cost-benefit analyses and using them for evaluation of policies and projects. When

performing benefit transfers, this situation leads to a greater weighting of the preference

structure prevailing in Anglo-Saxon countries; this can only be mitigated by carrying out more

primary studies in Germany.

Primary studies now exist in Europe for the valuation of health damage (cf. for example

CSERGE 1998). Under the EU project HEATCO (cf. http://heatco.ier.uni-stuttgart.de/), survey

studies are currently being carried out to value traffic noise impacts in five European countries

(including Germany). These are also investigating the transferability of results between

different countries.

For transferring figures between countries, it normally makes sense to adjust them on the basis

of the average per capita income weighted with purchasing power parities (PPP).

WA = WS * (YA / YS)e

where WA is the value for the application in view

WS is the value determined in the primary study

YA is the PPP-weighted per capita income in the application in view

YS is the PPP-weighted per capita income in the primary study

e is the income elasticity of willingness to pay

The income elasticity e is a measure of the extent to which willingness to pay to avoid a risk

alters with changes in income. After an analysis of several studies, Pearce (2000) recommends

23

using income elasticities in the region of e = 0.3 to 0.6.43 These figures can be taken as a

benchmark if no specific empirical information is available for the problem in view.

It is obvious that where results are transferred on the basis of income, this does not take

account of cultural differences and differences in behaviour and preference structures between

the two countries considered. If these differences are very large, this limits the value of such a

transfer of results.

Adjusting the figures for different countries includes the value judgement that greater

importance is attached to environmental damage in a relatively rich country than in a poorer

country. In many cases, however, there will be a tendency to use average figures. For example,

it is normal practice in the European studies of the ExternE series to use EU average figures for

calculation purposes. The Federal Environment Agency also takes the view that using

European average figures is an acceptable and practicable solution.

43 According to Pearce, further studies are necessary to verify these figures.

24

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